STRENGTHS

Strategic geographical position between China and Europe (Silk Road Development Project)

Potential for diversification of production, including agribusiness (dairy products, meat, cashmere) and tourism

WEAKNESSES

Economy’s vulnerability to changes in commodity prices

Strong exposure to the Chinese economy

Internal political dissensions

Alarming level of corruption and risks associated with rising inequalities as well as less inclusive mining development

RISK ASSESSMENT

The mining sector as a growth driver

Growth in 2019 is expected to be even more dynamic than in 2018, thanks to the continued boom in the mining sector as a result of high mineral prices (especially coal and copper). The development of the Oyu Tolgoi mining project (one of the world's largest gold and copper reserves, operated by Rio Tinto through its subsidiary Turquoise Hill), which is expected to be fully operational by 2020, will likely to continue to boost copper exports, despite forecasts of lower prices in 2019. These exports, as well as those of coal (the country's largest export in volume terms), should make a positive contribution to growth from net exports, although lower than in 2018, due to higher imports. In this context, investor confidence should continue to improve (+48.1% investment in the first quarter of 2018 compared to the same period in 2017), supported by the multi-party political agreement in favour of major investment projects. The influx of foreign direct investment is expected to benefit both the industrial and residential construction sectors in response to increasing urbanisation. However, growth will remain highly vulnerable to a fall in Chinese demand (85% of the country's exports). Public consumption is expected to benefit from the fiscal policy loosening in 2019, while private consumption should gain from the 8% increase in civil servants’ wages that was decided in September 2018 and from a potential further increase in 2019. Inflation is expected to remain below the central bank’s 8% target, which is expected to adopt a tighter monetary policy after a first increase in its key rate (11% for one-week bonds) in November 2018.Risks remain in the banking sector, which is still largely undercapitalised, while the first reforms have been implemented (process of reviewing the quality of banking assets at the end of 2017).

Twin accounts still largely in deficit

As part of the program accompanying the IMF's EFF set up in May 2017 (equivalent to USD 425 million), the government has committed to reducing the public deficit. These fiscal consolidation efforts have resulted in, among other things, the introduction of a progressive income tax, an increase in taxes on alcohol and tobacco, and an increase in the retirement age. However, the fiscal policy stance should loosen in the coming year as the 2019 budget plans to boost expenditures, increasing public investment and civil servants’ salaries (+16% planned). Nonetheless, despite its very high level, debt should remain sustainable in the short term. Indeed, the dynamism of growth and the first efforts made have allowed the government to issue USD 800 million in bonds at the end of 2017 at a lower interest rate (5% compared to 11% in 2016), covering all maturities until the end of 2020. 85% of this debt is denominated in foreign currencies and remains very vulnerable to a sudden depreciation of the tögrög, as was the case in 2016 (25% loss in value). The trade surplus is expected to be lower than in the past, following the increase in imports due to the demand for equipment. The lower dynamism of coal prices and the lower copper prices will likely prevent exports from offsetting this increase. Both the services balance and the income balance will be in deficit, due to foreign services and the repatriation of corporate profits. The resulting large current account deficit will be more than offset by increasing foreign direct investment. Foreign exchange reserves are expected to continue to grow, equivalent to 3.5 months of imports at the end of 2017, making the country less vulnerable to external conditions.

A more stable political situation but still exposed to latent internal tensions

After the victory of the Mongolian People's Party (PMD) in the June 2016 parliamentary elections (65 of the 76 seats in Parliament), the June/July 2017 presidential election brought the opposition party's candidate, Khaltmaagin Battulga (Democratic Party) to power. Following this defeat, internal struggles resurfaced in the parliamentary majority, leading to the dismissal of Prime Minister Jargaltulga Erdenebat in September 2017on allegations of corruption. The appointment of Khurelsukh Ukhnaa as the new Prime Minister in October 2017 has stabilised the situation, but has not ruled out further developments in intra-party struggles. In terms of the business environment, the large majority of the PMD in parliament should ensure a certain efficiency in reforms, as well as support for foreign investment projects. On the social level, the main challenge for the government will be to address the challenges related to the country's increasing urbanisation, increasing migration flows and a more equal distribution of mineral wealth. These various points, as well as the fight against corruption, were defined as priorities by President Battulga during his campaign in June 2017. Mongolia will likely continue to seek to diversify its diplomatic partners beyond its Russian and Chinese neighbours, in particular through a rapprochement with India.